Teekay Earnings Call Insights: Tanker Dropdown, CapEx

On Thursday, Teekay Corporation (NYSE:TK) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

Tanker Dropdown

Michael Webber – Wells Fargo Securities: I wanted to start with offshore side of the business, and around the Knarr specifically, and I’m not sure if BG has an extension option on that contract, which I think you guys are waiting for before you guys look to lock up long-term financing, any indication there in terms whether or not they’ll be extending that contract, and then kind of in general, how are you guys thinking about a potential JV partner for the Knarr just given its sheer size?

Peter Evensen – President and CEO: Well, to be specific it isn’t an extension option. They can choose between whether they want to pay more money over six years as (consultation) fee or more straight line over 10 years. So, under the contract they don’t have to make that election yet, but the present value effect of whether they choose six years or 10 years doesn’t – isn’t material in reality. So, we’re advancing the project and I think as we de-risk it through the construction phase, the value of the project rises. So, we may very well look as other FPSO companies have done on these large projects to take in joint venture investors.

Michael Webber – Wells Fargo Securities: Is it safe to say that you guys would need to see some sort of indication from BG before you guys look to secure a JV partner and/or long-term financing on the asset?

Peter Evensen – President and CEO: No, I don’t think that is correct. We can move forward, but we will know that well before. They have to elect that by the end of this year.

Michael Webber – Wells Fargo Securities: Peter, along those lines, and you guys move the Tiro Sidon to the Odebrecht JV earlier in the year. Was that at $179 million, and I know it’s not completed yet, was that done at cost or was there any sort of mark-to-market there, how should we think about that?

Peter Evensen – President and CEO: There is a sliding scale which gives us an incentive in our role as developing the project. So, we haven’t given the total economics of that transaction yet, under which Odebrecht will take 50%, but we’re very happy with the joint venture that we have with Odebrecht. I think, it sets us up very much for future growth in Brazil. So, the Tiro Sidon is good because it helps us with the operations that we’re going to have. Odebrecht has also helped us in terms of the relationship with Petrobras, so we’re very happy with that. But we haven’t given specific, guidance around the exact terms of that partnership.

Michael Webber – Wells Fargo Securities: With staying on, I guess, the FPSOs for a second, you guys won a FEED study through Sevan earlier in the year with the Skrugard – kind of Skrugard/Havis fields, just are you guys getting more traction up there in that area with the cylinder designs from Sevan and can you maybe talk a little about what you’re seeing in terms of tendering activity and then FEED studies you guys are involved in right now?

Kenneth Hvid – EVP and Chief Strategy Officer: Hey, Mike. It’s Kenneth. We’re generally seeing a broad interest, well, I assume that’s the sign both in the North Sea, but also the Barents Sea, and even outside. So, as you know, the business model for Sevan changed somewhat after we came in and acquired 40% of the company, so the company now is primarily focused on participating in these FEED studies. They were awarded one as you correctly pointed out, and they are in discussions on a couple of other ones, and what we see there is that’s just a great way for us to get into these projects early on.

Michael Webber – Wells Fargo Securities: So, it’s pretty safe to say from a – relative to the ship shape design, you’re seeing a little bit more traction with the Sevan design at this point, and you guys are involved in maybe two to three more, and talking about two to three more field studies at this point?

Kenneth Hvid – EVP and Chief Strategy Officer: What I think is fair to say is that what we are seeing is that we are in talks with everybody at the moment, because we have some people that are looking for the ship shape design, and we have others that prefer the cylindrical one, and that obviously is all based on what field we are discussing about. What exciting here is that we are in talks now on pretty much all of the deals. So we get a call every time that there is a requirement.

Peter Evensen – President and CEO: We do think that the cylinder does have benefits over the ship shape as you move north, especially if they are going to have onshore electricity generation going to the unit and its ice keeping capability.

Michael Webber – Wells Fargo Securities: Right. That’s very helpful. Peter, I think, the same day you guys actually announced the tanker dropdown, you guys also announced the Kroner bond, which you mentioned in your commentary. Can you maybe talk a little bit about the rationale for entering that market from a funding perspective and then in terms of putting that capital to use. Are you looking in individual assets, could we see separate individual corporate entities being acquired? I mean, how should we think about these sort of capital?

Peter Evensen – President and CEO: Well, first of all, we thought it was a great way to access funds, and I think these days when you’re not quite sure about which way the financial environment will go it’s always good to diversify what you have. But for us at Teekay LNG, we thought it was a great way to be able to have liquidity to make near-term acquisitions. So it was a great way to boost up our liquidity and in these markets, and I’d say that for all of our businesses to have money when other people don’t is really an advantage.

Michael Webber – Wells Fargo Securities: Fair enough. That’s helpful. One more from me and I’ll hop back in queue. The tanker dropdown when it closes it’s going to provide a pretty nice net liquidity gain and you guys should also see some cash coming in the door from the Foinaven dropdown and potentially the Voyageur later in the year. Kind of, within that context, Peter, how do you guys think about restarting or potentially restarting your buyback program this year? Do you need to wait for the FPSO dropdowns to do that or how are you guys thinking about that internally?

Vincent Lok – EVP and CFO: This is really more of the debt deleveraging event. It doesn’t actually increase our liquidity because we are transferring the debt facilities down. I think we will give more specifics at the Investor Day coming up, but from our point of view it frees up capacity. We think there’s – as I just alluded to with my comment, I think there’s going to be a lot of interesting opportunities coming forward. We want to once again reposition Teekay to be able to take advantage of acquisition environments. We liked the Sevan deal last year and I think will be more those kinds of deals going forward. Another thing that we think is – there will be these – a lot of these new projects that you just asked about, Skrugard and other ones, those are all 2015 going forward. Well, I think that’s an important part, and as I said in my prepared remarks, it does simplify the Teekay corporate structure. So, I think the simplicity in the alignment will make it easier for investors to understand the role of each company.

CapEx

Joshua Katzeff – Deutsche Bank: It’s Josh Katzeff on for Justin. I just want to quickly follow on, I guess, Mike’s last question, with regard to financing and the deleveraging. I guess there has been a structural shift in your liquidity at the parent company, and there’s a lot less capacity under the revolver. So, I guess, how are you looking at financing new CapEx going forward? Is it going to be more reliant on project-based debt and I guess equity commitments from your cash?

Vincent Lok – EVP and CFO: Well, I think that the – if you looked at our earnings release, you’ll see that most of the financing on our CapEx is several years out, like out in 2014. We have financed all of our near-term 2012 CapEx that we have going forward. So, in some respects you don’t want to invest or put in place CapEx on everything at the start, although people look at that right now. We have a number of financings in place that I think we will go forward. For example, what we haven’t financed yet are our four BG shuttle tankers, that’s about $500 million, and we expect to put in place that financing just as part of it, but we don’t need that financing until midyear 2013.

Joshua Katzeff – Deutsche Bank: I guess my question was more focused on future CapEx and new projects that you might be bringing more into the Company?

Vincent Lok – EVP and CFO: Well, we can either arrange financing at that time or we could always put in place a new standby revolving credit facility. We have assets which haven’t been encumbered up at Teekay Corporation. I think right now we’re more concentrated on the fact that we should reduce our leverage up at Teekay and we’re not really bugged about liquidity side of things.

Peter Evensen – President and CEO: I think the other thing to note is, as you’ve seen the growth in our daughter companies and their ability to access equity, as well as now the bond markets. The daughters are able to do the direct acquisitions without any financial support from the parent. So, there is probably less need for warehousing other than very large projects like the Knarr FPSO at the parent level. As we continue to execute on our dropdown strategy, that will free up capital again and recycle the capital of the parent company for further investment.

Joshua Katzeff – Deutsche Bank: I guess with regard to the dropdown strategy, I guess would you be able to provide any update on time frames, or I guess, maybe schedule for an drop downs?

Peter Evensen – President and CEO: I think, we’ll discuss that more at investor day.

Joshua Katzeff – Deutsche Bank: Got it. And shifting to the FPSOs and the offshore market, I guess, in the presentation you mentioned that there have been a bunch of tenders already, and you’re expecting a lot more. I guess, has Teekay been participating in the existing tenders, and I guess, what does it make sense for Teekay into these transactions, I guess, if you did participate?

Peter Evensen – President and CEO: Which market are you talking about?

Joshua Katzeff – Deutsche Bank: In the FPSOs?

Peter Evensen – President and CEO: Oh, in the FPSOs, yeah, we’ve looked at several of them, but we’re – as I said, we’re busy trying to execute the ones that we have, and so we’re actually more interested in FPSOs that are going to be in 2014 and 2015, and even out into 2016. With our engineering guys very much focused in on the three that we’re doing right now, we’re not interested in more near term opportunities, but I would say we’re really looking much more at newbuildings rather than conversions. We think that fits in better with what – how our customers require going forward. However, on the FSO side, there we’re looking much more at conversion of older tankers, so it depends on each sector very much.

Joshua Katzeff – Deutsche Bank: Got it. Got it. And just one more question before I turn it over, there is still the 4 Suezmaxes at the parent level, I guess, how should we think about those as being part of the, I guess, core parent fleet?

Peter Evensen – President and CEO: Yeah. We’re very happy with those tankers. Those are modern tankers. They’re all sister ships. So, I always say I won’t refuse any offer, but I have to say that we were very happy, so we left them out of the offer that were – that we gave to Teekay Tankers. We like them, they work really well, they are a key part of the Gemini Suezmax tanker pool. As I said, we think we might very well hold them just for the rebound that we see coming up in the future in tankers.